1977 (6) TMI 45 - AT - Income Tax

Summary

Issues:
- Allowance of deduction under section 40(3) of the Income-tax Act 1961 based on cash payments made to suppliers.
- Assessment of business compulsion for making cash payments.
- Interpretation of unavoidable circumstances for cash payments in business transactions.

Analysis:
1. The appeal before the Appellate Tribunal ITAT DELHI-D involved a dispute over the allowance of a deduction of Rs. 18,000, which was disallowed by the Income-tax Officer under section 40(3) of the Income-tax Act 1961. The Revenue challenged the order of the Appellate Asstt. Commissioner, Bareilly, objecting to the allowance granted for the deduction.

2. The assessee, a commission agent in cloth, had made cash payments to suppliers, Kesho Ram Govind Ram and Jani Ram Girdhari Lal. The Income-tax Officer disallowed the payments, invoking section 40(3), as the payments were made in cash without sufficient justification. The assessee contended that the suppliers required cash payments due to unavoidable circumstances, supported by affidavits and business practices.

3. On appeal, the Appellate Assistant Commissioner allowed the deduction, emphasizing the genuineness of the payments and the business compulsion faced by the assessee. The Commissioner noted the lack of material defects in the order and upheld the business necessity for cash payments due to limited banking facilities and supplier requirements. The Commissioner found the assessee's case well-established and justified in allowing the deduction under section 40(3).

4. The department appealed the Commissioner's decision, but the Appellate Tribunal dismissed the appeal, affirming the business compulsion faced by the assessee in making cash payments. The Tribunal emphasized the need to interpret unavoidable circumstances in a business context, considering the practical challenges faced by small businesses in India. The Tribunal confirmed the deletion of the disallowed amount, supporting the Commissioner's reasoning and the genuineness of the cash payments.

5. Ultimately, the Tribunal upheld the decision of the Appellate Assistant Commissioner, confirming the allowance of the deduction under section 40(3) for the cash payments made by the assessee to the suppliers. The judgment highlighted the importance of considering business realities and practical constraints in interpreting tax provisions related to cash transactions, especially for small businesses with limited banking access.